At this time, one of the questions which is very common and grapples all investors is whether to book profit or restructure one’s portfolio to lock in the portfolio gains.
As the second wave of the pandemic has hit our country more furiously than any other country in the world, all the major states have opted for partial or full lockdown to contain the wild spread of COVID-19. Given the situation, it seems very likely that the pandemic will not end any time soon or at least till the time majority of the Indian population gets vaccinated.
At such a time, one of the questions which is very common and grapples all investors is whether to book profit or restructure one’s portfolio to lock in the portfolio gains. Before attempting to answer the question or making a decision, let us understand the situation first.
Phase 1 (First Wave)
An unexpected virus hit the world, just about when Indian economy started showing early signs of economic recovery. The pandemic raged across the country and even though the government was not prepared to deal with a lockdown kind of a situation, there was no other option left and lockdown ensued. Economic activity came to a standstill as people across the country were forced to shut themselves home in order to stay safe from a deadly virus. It was clear that a serious ramp up in medical infra was the need of the hour in order to deal with the pandemic and potential worse times ahead.
Owing to domestic as well as international uncertainty, Indian equity market reacted sharply and lost ground sharply in about 10 trading sessions. Post lockdown, the government and the RBI took several measures to improve systemic liquidity. One of the steps was to reduce rates and provide stimulus as a means to revive the economy. This was followed with various announcements in the budget to boost infrastructure and manufacturing in the country. All of these steps aided in economic recovery which could be seen through the various parameters of economic activity.
Phase 2 (Second Wave)
Given our previous experience, individuals, corporates and the government were well aware on how to manage the changing times. There was enormous liquidity in the system, medical infra was better prepared and hence the government focused on containment zone management which helped in preventing another round of a national wide lockdown. Major economic activities like infra and manufacturing were kept going as it directly or indirectly impacts the livelihood of sizeable chunk of the population.
After analyzing both the situations, it is clear that one can book profits not in the form of sitting on cash or shifting to a debt fund, but by way of portfolio restructuring. This is the time to trim allocation to large cap fund and move money to mid, small and value category. Sitting on cash or trying to time the markets will only lead to long-term profit erosion. The rationale for this decision is as follows:
The government has stepped out aggressively to boost economy through its various measures like cutting corporate tax, enhancing production linked incentive scheme (PLI), and working on required reforms along with pushing ‘Atmnirbhar Bharat’ which holds the potential to put India on a new economic growth trajectory. So a pro-growth government keen to spend on infrastructure and other core sectors coupled with low cost of funds for corporates are positives for the market in medium term.
Over the past few years, market was polarized with a few heavy weight powering benchmark indices to new highs while border market failed to keep pace. In the current rally, however, the up move was broad based with participation from across sectors and market caps. This is an indication that confidence of economic growth is making a comeback. Nevertheless, small cap index is yet to catch up and is nearly 40% lower from its life-time high of January 2018. Interestingly, during the same time, Nifty and Sensex surged approximately 40%.
The higher capital expenditure plan announced during Union Budget 2021 is aimed at helping the economy grow and heal faster. That, in turn, will aid midcap and small cap stocks which are more aligned to the domestic economic recovery. So, going forward, small and mid-cap pockets present an opportunity to make gains for those who are ready to stay invested with a long-term perspective.
(By Nitish Purohit & Vidit Bhura, Partners, JNV Financial Services LLP)